Do Carnival Insiders Know Something We Should?

The COVID-19 pandemic has surely sunk Carnival Cruise Line(NYSE: CCL), right? There's no way the company could recover from the immense negative publicity and dockets filling with pending lawsuits, right? Well, some insiders are holding out hope — and one even made a $10 million bet on its future. Even the Kingdom of Saudi Arabia bought an 8.2% stake. Let's see whether these votes of confidence suggest that investors should start boarding.

Image source: Carnival Cruise Lines.

Anchors aweigh?

One of the classic greenlights to getting in on a stock is when insiders do. These can be C-level executives, other higher-ups, members of a board of directors, or even certain shareholders. They are heavily bought in to a company, and their confidence in its future performance spurs them to buy low, confident that the stock will go high. Maybe they're just good company people, loyal to the brand. Maybe they are experts in their industry and are skilled in making lemonade from lemons.

Now, there's two types of insider trading, and only one of them -- the kind where you trade based on knowledge the general public doesn't have -- will land you in prison. This is not that kind. Instead, call it it substantiated optimism.

The Securities and Exchange Commission (SEC) requires these people disclose their activity within 48 hours ("before the end of the second business day") if they own 10% or more of a company's outstanding stock. SEC Form 4, the Statement of Changes in Beneficial Ownership must be filed, detailing the transaction and their relationship to the company.

On April 6, Randall J. Weisenburger, Carnival Corporation Board Director since 2009, placed an order for 1.25 million of the company's stock, at $8 a share. That's an insider buy of $10 million. Good for him, but why should we care? As legendary American investor Peter Lynch, who once shepherded the Magellan Fund at Fidelity to $14 billion in assets once said, "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise." https://www.sec.gov/Archives/edgar/data/815097/000112760220013347/xslF345X03/form4.xml

On March 2, CCL traded at $33.06. By the time the World Health Organization declared the novel coronavirus a pandemic March 11, the stock had dropped to $21.75. Weisenburger waited in the weeds before pouncing, and that strategy has seemed to pay off. By May 19 it was up to $14.14, continuing an uptick that began April 3. Great timing, right? Shares still fall short of the all-time high of $71.61 on Jan. 1, 2018, but analysts are now projecting a bullish short- (two to six weeks) and medium-term (six weeks to nine months) future for the line.

Weisenberger increased his personal stake by 997% with the buy — the first insider purchase of CCL since COVID-19 sent stormy seas to the cruise lines in March. His Form 4 shows he now owns more than 1.375 million shares in the company. Weisenberger's previous CCL insider purchase was on July 3, 2019, when dropped $930,000 to buy 20,000 shares at $46.50 each, bringing him up to a stake of 122,934 shares.

Investors of Arabia

Image source: Getty Images.

With all of its 100 ships docked and no plans to resume operations until August, the world's largest cruise line's stock has dropped in value about 70% overall since the pandemic began. Carnival says it costs about $1 billion — a month — to operate the company, and that's why it sold almost 72 million shares of its common stock April 6 at the bargain-basement $8 Weisenburger got in on.

That also opened the door for other wealthy investors — namely the Saudi royal family — whose accounts are managed by the country's Public Investment Fund (PIF). The PIF describes itself as a kind of global angel investor on its website. "[Our vision is] to be a global investment powerhouse and the worl​d's most impactful investor, enabling the creation of new sectors and opportunities that will shape the future global economy, while driving the economic transformation of Saudi Arabia," the mission statement reads.

The PIF bought 43.5 million shares for about $348 million in cash. The Kingdom (by way of the PIF) now owns an 8.2% stake in Carnival.

So what motivated Weisenburger and the Saudis to up their antes?

Liquidity is especially important on the sea

On May 14, Carnival outlined measures it has taken to keep itself afloat during its "extreme pause in guest operations." Carnival Corporation CEO Arnold Donald said recent financial actions like emergency financing and the stock sale, had netted the line $6.4 billion of additional liquidity. He said he is confident of a turnaround.

"It's also encouraging to note that the majority of guests affected by our schedule changes want to sail with us at a later date, with fewer than 38 percent requesting refunds to date," Donald said in a statement to investors online. "Our booking trends for the first half of 2021, which remain within historical ranges, demonstrate the resilience of our brands and the strength of our loyal recurring customer base, of which 66% are repeat cruisers. In addition, we plan to stagger fleet reentry to optimize demand and operating performance over time."

In short, Weisenburger and the Saudis seem to share the company's optimism about a future recovery.

Red skies at night?

Image source: Carnival Cruise Lines.

The mariner's ancient rhyme (not to be confused with the Rime of the Ancient Mariner), "Red skies at night, sailor's delight; red skies at morning, sailors take warning" can be applied to Carnival's situation. Basically, tonight's "red skies" mean a storm has begun to clear out, and a brighter day with smoother sailing is on the horizon tomorrow.

When big insiders and big governments seize an investment opportunity like this, the rest of us should take notice. Is it corporate braggadocio? Maybe. But at its current low share price, Carnival may still be worth at least a small to medium-sized position.

This latest sale of Carnival stock has raised a lot of money that the company can use to stay afloat for the near future, help it navigate to the other side of the COVID-19 pandemic — whenever and wherever that is — and sail to calmer, more profitable waters.

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Mike Raye has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool recommends Carnival and Uber Technologies. The Motley Fool has a disclosure policy.